Federal Ethics for the Tax Professional: Circular 230 and IRC §6694

1. Federal Ethics for the Tax Professional: Circular 230 and IRC §6694 2013 Edition The JW Group, LLC P.O. Box 507 Aptos, CA 95001-0507 (831) 435-3271 www.thejwtaxgroup.com

2. Federal Regulation of Tax Preparers - Overview • Title 31 Code of Federal Regulations, Subtitle A, Part 10 – also known as Circular 230 – provides Federal regulations governing the practice before the Department of Treasury / Internal Revenue Service. • The statutory authority for these regulations is 31 U.S.C. §330.

3. General Scope of Circular 230 • Pursuant to §10.0 of Circular 230, attorneys, certified public accountants, enrolled agents, enrolled retirement plan agents and registered tax return preparers are subject to the regulations set forth in Circular 230. • In addition to those tax professionals listed above, other persons representing taxpayers before the Internal Revenue Service are also regulated by Circular 230 under certain circumstances.

4. Office of Professional Responsibility (OPR) • Under §10.1 of Circular 230 the Office of Professional Responsibility (OPR) is the primary section of the Internal Revenue Service that has the power to administer and enforce the regulations set forth in Circular 230. • The OPR has the power to discipline tax practitioners for violations of the rules contained in Circular 230.

5. What is Considered “Practicing” Before the IRS? • §10.2(4) of Circular 230 states that practice before the Internal Revenue Service (IRS) comprehends all matters connected with a presentation to the IRS relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. • Such presentations include, but are not limited to: preparing documents; filing documents; corresponding and communicating with the IRS; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.

6. Who May Practice Before the IRS • Per §10.3 of Circular 230, Attorneys, Certified Public Accounts, Enrolled Agents and Enrolled Actuaries in good standing may practice before the IRS. • Practice as a registered tax return preparer is generally limited to preparing and signing tax returns and claims for refund, and other documents for submission to the IRS. • A registered tax return preparer may represent taxpayers before the IRS during an examination only if the registered tax return preparer signed the tax return or claim for refund for the taxable year or period under examination.

7. Review Question No.1 Q1: The regulations found in Circular 230 can be found in: • §162 of the Internal Revenue Code • Title 31 Code of Federal Regulations, Subtitle A, Part 10 C) IRS Publication 225 D) IRS Publication 334 Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

8. Answer to Review Question No.1 • The correct answer is B • Answer A is incorrect because this code section deals with the deductibility of trade or business expenses. • Answer C is incorrect because this publication is the Federal tax law guide for farmers. • Answer D is incorrect because this publication is the Federal tax law guide for small businesses.

9. Review Question No. 2 Q2: Which of the following is false regarding the Office of Professional Responsibility (OPR)? • It is part of the Internal Revenue Service • The OPR has the power to administer and enforce the regulations contained in Circular 230 C) The OPR has the power to discipline tax practitioners for Circular 230 violations D) None of these statements are false Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

10. Answer to Review Question No. 2 • The correct answer is D • Answer A is incorrect because the OPR is a division within the Internal Revenue Service • Answer B is incorrect because the OPR is specifically empowered to administer and enforce the Regulations contained in Circular 230 per §10.1(a). • Answer C is incorrect because part of the OPR’s power to administer and enforce Circular 230 on tax practitioners includes the power of discipline.

11. Qualifying Continuing Education for Registered Tax Return Preparers • Per §10.6 of Circular 230, registered tax return preparers must complete a minimum of 15 hours of qualifying continuing education credit per year. • The 15 hours must include (at a minimum): • A) Two hours of ethics or professional conduct • B) Three hours of Federal tax law updates, and • C) 10 hours of Federal tax law topics.

12. Qualifying Continuing Education for Registered Tax Return Preparers (Continued) • Per §10.6(j) of Circular 230, compliance with the continuing education requirements for a registered tax return preparers is determined by the IRS. • The IRS will provide notice to any registered tax return preparer who fails to meet the continuing education requirements for eligibility of renewal. • The notice will state the basis for the determination of noncompliance and will provide the individual an opportunity to furnish the requested information in writing relating to the completion of all required continuing education hours for the registration year.

13. Review Question No. 3 Q3: Which of the following of the following is false regarding qualifying continuing education courses for registered tax return preparers? • At least two hours of ethics or professional conduct are required each year. • At least three hours of Federal tax law updates are required each year. • At least six hours of Federal tax topics are required each year. D) A minimum of 15 hours of qualifying continuing education is required annually Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

14. Answer to Review Question No. 3 • The correct answer is C All of the answers except for Answer C are part of the new Federal continuing education requirements for registered tax return preparers starting in 2012. Answer C is incorrect because a minimum of 10 hours of Federal law topics are required every year for registered tax return preparers starting in 2012.

15. Duties and Restrictions Relating to Practice Before the IRS • Circular 230 contains a number of rights and responsibilities on tax practitioners that practice before the IRS. • Per §10.20 of Circular 230, a practitioner must, upon a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

16. Duties and Restrictions Relating to Practice Before the IRS (continued) • Where the requested records or information are not in the possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting Internal Revenue Service officer or employee and the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information.

17. Duties and Restrictions Relating to Practice Before the IRS (continued) • The practitioner must make reasonable inquiry of his or her client regarding the identity of any person who may have possession or control of the requested records or information, but the practitioner is not required to make inquiry of any other person or independently verify any information provided by the practitioner’s client regarding the identity of such persons.

18. Knowledge of Client’s Omission • §10.21 of Circular 230 states that a practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission.

19. Knowledge of Client’s Omission (Cont.) • The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

20. Reliance on Other Professionals – Diligence as to Accuracy • With some exceptions, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person.

21. Prompt Disposition of Pending Matters Before the IRS • A practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service.

22. Review Question No. 4 • Which of the following tax practitioners would be in violation of the Circular 230 regulations? • Bill Bridge, an Enrolled Agent, who did not properly submit information that was properly and lawfully requested by an IRS employee and Bill did not believe in good faith that the information was privileged. • Susan Stone, a Certified Public Accountant, who intentionally and unreasonably delayed responding to a lawful and proper request from the IRS for the tax return workpapers of a client because the CPA knew the IRS agent making the request would be retiring in a few weeks and the practitioner and client preferred to work with another IRS agent. • Ray Shines, a registered tax return preparer, after filing his client’s 2012 tax returns, discovered that $15,000 in taxable income was unreported on the tax return. After becoming aware of this omission, Ray did not mention anything to the client regarding this unreported income. • All of the above practitioners would be in violation of the Circular 230 regulations. • None of the above practitioners would be in violation of the Circular 230 regulations. Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

23. Answer to Review Question No. 4 • The correct answer is D. • Bill Bridge violated the regulation that required practitioners to promptly submit records or information to the IRS if the request is legal and proper and the practitioner does not believe in good faith, on reasonable grounds, that the records or information is privileged. • Susan Stone violated the regulation that prohibits practitioners from unreasonably delaying the prompt disposition of any matter before the IRS. • Ray Shines violated the regulation that requires practitioners to promptly advise their clients of the fact that an omission has occurred as well as the consequences resulting from the omission.

24. Tax Practitioner Fees – In General • §10.27 of Circular 230 covers the area of fees charges by a tax practitioner to the client. • A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.

25. Practitioner Fees: Contingent Fees • The default rule under Circular 230 is that a tax practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service. • A contingent fee is defined, under Circular 230, as follows: Any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation.

26. Practitioner Fees: Contingent Fees (Cont.) • In addition, a contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained. • A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client’s fee in the event that a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect.

27. Contingent Fees (Cont.) • However, a practitioner may charge a contingent fee for services rendered in the following three circumstances: • 1) The Service’s examination of, or challenge to an original tax return or an amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return. • 2) A claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service, or • 3) Services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.

28. The Client’s Records • In general, a practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations. • The practitioner has the option to retain copies of the records returned to a client. • The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility to return the records to the client.

29. The Client’s Records (Cont.) • Nevertheless, if applicable state law allows or permits the retention of a client’s records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the taxpayer’s return. • The practitioner, however, in such an event as detailed above must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her Federal tax obligations.

30. The Client’s Records (Cont.) • Note that the “records of the client” include all documents or written or electronic materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner’s representation of the client, that preexisted the retention of the practitioner by the client. • It also includes materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation.

31. The Client’s Records (Cont.) • It also includes any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current Federal tax obligations. • However, records of the client does not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner’s firm, employees or agents if the practitioner is withholding such document pending the client’s performance of its contractual obligation to pay fees with respect to such document.

32. Conflicts of Interests • The default rule is that a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest.

33. Conflicts of Interests (Cont.) A conflict of interest exists if: (1) The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner.

34. Conflicts of Interests (Cont.) • However, even if there is a conflict of interest, a tax practitioner may nevertheless represent a client if: • (1) The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; • (2) The representation is not prohibited by law; and • (3) Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner.

35. Conflicts of Interests (Cont.) • The confirmations from the clients may be made within a reasonable period of time after the informed consent, but in no event later than 30 days.

36. Conflicts of Interests (Cont.) • Copies of the written consents must be retained by the practitioner for at least 36 months from the date of the conclusion of the representation of the affected clients. • Furthermore, the written consents must be provided to any officer or employee of the Internal Revenue Service on request.

37. Review Question No. 5 • Which of the following fees are allowed to be charged to a client by a tax practitioner? • 30% of the amount of the refund amount to file a client’s original 1040. • 50% of the amount of the refund amount to file a client’s original 1040 – if the 1040 is not audited. • 25% of the refund claim prepared by the tax practitioner within 120 days of the client receiving a written notice of the examination of the originally filed 1040. • All of the above. • None of the above. Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

38. Answer to Review Question No. 5 • The correct answer is C. A is incorrect because this is a contingent fee as it is based on the percentage of the refund reported on a return and contingent fees are not allowed for originally filed tax returns. B is incorrect because this is also an originally filed return and the fee is contingent on both the amount of the refund and if the original return is not picked for examination by the IRS. C is correct because while it is a contingent fee, contingent fees are permitted for refund claims made within 120 days of the client receiving a written notice of the examination of the originally filed return.

39. Review Question No. 6 • Which of the following is permitted: • A tax practitioner refuses to return the current tax year’s W-2’s of the client until the client pays $1,000 of unpaid tax return preparation fees from the prior year. • A tax practitioner who refuses to provide tax return workpapers that the practitioner prepared during the preparing of the client’s 2012 tax returns until the unpaid tax return fees for the 2011 tax year have been paid. • Both A and B. • Neither A or B. Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

40. Answer to Review Question No.6 • The correct answer is B. A is incorrect because a tax practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations. A W-2 is necessary to file one’s Federal income tax returns. B is correct because workpapers prepared by the practitioner are not considered records of the client that must be returned to the client upon request of the client.

41. Advertising – In General • A practitioner may not, with respect to any Internal Revenue Service matter, in any way use or participate in the use of any form of public communication or private solicitation containing a false, fraudulent, or coercive statement or claim; or a misleading or deceptive statement or claim.

42. Advertising of Practitioner’s Fees • A practitioner may publish the availability of a written schedule of fees and disseminate the fee information for the following: • (1) Fixed fees for specific routine services. • (2) Hourly rates. • (3) Range of fees for particular services. • (4) The fee charged for an initial consultation.

43. Advertising of Fees (Cont.) • Any statement of fee information concerning matters in which costs may be incurred must include a statement disclosing whether clients will be responsible for such costs.

44. Advertising of Fees (Cont.) • A practitioner may not charge more than the rates published for at least 30 calendar days after the last date on which the schedule of fees was published.

45. Negotiation of Taxpayer Checks • A practitioner who prepares tax returns may not endorse or otherwise negotiate any check issued to a client by the government in respect of a Federal tax liability.

46. Review Question No. 7 • Which of the following statements is false regarding conflicts of interest: • A practitioner is never allowed – under any circumstances - to represent a client before the IRS if a conflict of interest is involved. • A conflict of interest exists if the representation of one client will be directly adverse to another client. • Both A and B are false. • Neither A or B are false. Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

47. Answer to Review Question No. 7 • The correct answer is A. • A is false because while generally a tax practitioner may not represent a client if it involves a conflict of interest, nevertheless such representation is permitted so long as the conflicting clients submits written waivers (with specific requirements) to the practitioner. • B is not false because this is one of the regulations’ definitions of a conflict of interest.

48. Review Question No.8 • Which of the following advertisements are permitted: • Helen Sues, CPA, advertises in the local newspaper that she charges $100 per hour for tax planning services. • Nori Aki, registered tax return preparer, posts on her website that she charges $100 to prepare a Federal 1040-EZ. • Both A and B • Neither A or B Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]

49. Answer to Review Question No. 8 • The correct answer is B The ads listed under both answers A and B are allowed as a practitioner may publish the availability of a written schedule fees and disseminate the fee information for, among other items, fixed fees for specific routine services as well as for hourly rates.

50. Review Question No. 9 • True or False: A practitioner who prepares tax returns is allowed to endorse a Federal income tax return refund check issued to a client? Your Answer Here: ________ [Turn to the next slide only after you have answered this review question]